April 27, 2010
The Goldman Sachs Fun Fest : Explaining Hudson Mezzanine
Oh, man... watching the Senate hearings on GS actually makes me think that they may not be long for the world. One of the lines of questioning today regarded a transaction known at Hudson Mezzanine, specifically if GS misrepresented it's interest in the transaction. Here's what went down from what I can see...
GS had built a lot of structured credit products, based at the end on mortgage backed securities. These trades were tranched with a certain percentage being rated AAA and down until you got to the BBB level, the equity, which was usually no more than 10% of the total product. So, out of a $2bn CDO, only $200 mn might be equity. Now, the problem for GS was that they couldn't give the equity (also known as the mezzanine layer) piece away and but it had to exist so they could unload the other $1.8 bn in mortgage... GS just got stuck with it. It's toxic waste because it takes the first losses when defaults rise.
Now, GS was sitting on, let's say, $2bn of this toxic waste so it built a synthetic CDO, worked with the rating agency to get most of it rated AAA and then to offset their risk sold it to their customers. But, yet again, they were stuck with the equity... but that didn't matter since someone bought the other $1.8 bn of the CDO and that cash now sat there ready to be claimed by GS when everything went south.
So, net, Goldman Sachs with this trade reduced it's loss from $2bn to only $200mn. Of course, they sold the shit to their customers but that doesn't appear to have been a major concern...
The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.
“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”
The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.
According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.
“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.
During the hearing much was made by the GS folks of management desire to bring them net neutral on their mortgage related investments, neither long nor short. It's interesting that they chose to do this by, effectively, blowing up their customers with what they knew were going to be worthless securities.
Posted by mcblogger at April 27, 2010 02:35 PM
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